Activity-Based Costing: Benefits and Implementation

Description

This lecture covers the concepts of traditional costing methods and the emergence of Activity-Based Costing (ABC). It explains how ABC assigns overhead costs based on activities, providing a more accurate product cost for pricing and decision-making. The instructor discusses the strengths and weaknesses of traditional costing methods, highlighting the benefits of ABC in offering detailed cost measures and better activity understanding. Through examples, the lecture demonstrates the differences in unit costs between traditional and ABC methods, emphasizing the importance of accurate overhead allocation. The presentation concludes by showcasing how ABC can lead to a better understanding of product costs, aiding in pricing and product elimination decisions.

Official source

https://mediaspace.epfl.ch/media/0_k7vbdjnl

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Cost accounting

Cost accounting is defined by the Institute of Management Accountants as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs". Often considered a subset of managerial accounting, its end goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability.

Activity-based costing

Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore, this model assigns more indirect costs (overhead) into direct costs compared to conventional costing. CIMA, the Chartered Institute of Management Accountants, defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs.

Management accounting

In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions. One simple definition of management accounting is the provision of financial and non-financial decision-making information to managers. In other words, management accounting helps the directors inside an organization to make decisions. This can also be known as Cost Accounting.

Cost of goods sold

Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. Costs include all costs of purchase, costs of conversion and other costs that are incurred in bringing the inventories to their present location and condition. Costs of goods made by the businesses include material, labor, and allocated overhead.

Finance

Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, which is the study of production, distribution, and consumption of money, assets, goods and services (the discipline of financial economics bridges the two). Finance activities take place in financial systems at various scopes, thus the field can be roughly divided into personal, corporate, and public finance.